When considering succession planning strategies, business owners often focus solely on the sale of their business as the means of exit and close their minds to other potential options.
While a clean break can obviously reap immediate returns, sometimes there are alternatives that can be equally effective based on the objectives and circumstances of the business owners.
These include the use of private equity recapitalisation and employee share schemes (sometimes referred to as Employee Share Ownership Plans) for succession planning.
Private equity recapitalisation
Private equity recapitalisation allows a business owner to sell part of their business (thus realising some capital) but to retain some equity to sell at a later date.
This approach assists the business owner on a number of levels. It provides a capital return for the equity sold. It can also provide future income generation in the form of dividends from the remaining equity.
Thirdly, it provides the opportunity to benefit from the potential growth in the value of the remaining equity when the business is sold.
When external investors acquire a stake in the equity of a business, they usually do so with the intention of assisting to grow that business. Because of this, when the business is then sold, the original business owner benefits from the increased value of the remaining equity. This can result in significant gains.
This approach often suits business owners who do not need to realise large capital returns at the present time, preferring the potential for residual income and the potential for a later windfall. It can be used as a means of redistributing the ownership of a business as part of a longer term exit strategy.
For recapitalisation to work, it requires the business owner to have confidence in the longer term viability and growth potential in the business and be prepared to risk an immediate return against future income and a larger capital sum. It also needs a willing investor to be found.
Employee share schemes
The creation of an employee share schemes to free up equity and to facilitate a future sale is also worth considering.
A business owner can establish an ESS as a means to begin to liquidate their equity from their business as well as to encourage future potential buyers from within their existing workforce.
By allowing employees to acquire some equity in the company, the owner benefits from the proceeds of the sale of this stock, again providing an interim capital return. It also increases in employee loyalty and commitment, which should assist the business to grow if managed correctly.
The business owner then has the opportunity to groom their potential successors, who of course now have a financial stake in the company and who may ultimately acquire the business through a management buy-out.
ESS can be complex to set up and operate, but if used properly, they can facilitate business continuity and employee retention. They can also be structured to assist with tax planning.
This approach enables business owners to retain control of their company in a way that cannot be achieved by a sale to an outside investor.
The suitability of these options will, of course, be dependent on a number of factors. Both do however offer viable alternatives to an outright sale and are worth considering.